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Scary Numbers on Small-Business Fraud

December 20, 2018 / by Mark Schanen

Fraud Prevention-1"Small businesses lose almost twice as much per scheme to fraud" as larger businesses. That's just one of the disturbing findings in the Association of Certified Fraud Examiners (ACFE) "2018 Global Study on Occupational Fraud and Abuse."

According to the study, small businesses (which the ACFE defines as having fewer than 100 employees) sustained a median loss of $200,000 per fraud scheme, compared to $104,000 for larger businesses. Moreover, the study found that "a majority of the victims recovered nothing."

A Big Problem for Small Businesses
Why are small businesses particularly vulnerable to fraud? There are several reasons. First, many small-business owners start out in the corporate world (where high-level financial controls are part of the infrastructure) before venturing out on their own. So they tend to take security measures for granted and are too trusting of the people they bring onboard to operate their new business. Let's face it: No one hires an employee whom they think will try to defraud them.

Also, the nature of fraud schemes — and outright thievery — is different at smaller businesses than in the corporate world. It ranges from petty theft, such as skimming from cash sales in retail or hospitality, to embezzlement involving billing, checking, payroll, expense reimbursement, etc. And the common denominator is a lack of internal controls, often combined with a failure to segregate duties. If you allow the same person who writes the checks to reconcile the checking account, you're inviting trouble.

Fraud is far less likely to occur at the hands of a stranger than a trusted employee, even a relative or friend, who simply yields to temptation and exploits vulnerability in your internal controls. And once fraud starts at a small business, it tends to go on a long time before it's detected. (The ACFE report found that payroll fraud schemes had a median duration of 30 months.)

The main takeaway: Being too trusting of your employees — including long-time, high-level employees or even managers or executives — can burn you, big time.

Watch for the Warning Signs
Although small-business fraud is rarely perpetrated by those who "look like" criminals, the report nevertheless found that "85% of fraudsters displayed at least one behavioral red flag," such as "living beyond means." So if your $40,000-a-year office manager suddenly goes from brown-bagging it and driving a second-hand car to going out to lunch every day in a brand-new $80,000 SUV, it might be time to take a closer look at your books.

How You Can Take Control
You can eliminate a lot of temptation, and opportunity, by taking a few simple precautions, such as phasing out paper checks, enforcing separation of duties and switching to an online bill-paying solution. Outsourcing your bookkeeping along with certain other back-office functions, and conducting regular third-party audits, will also go a long way toward accomplishing that. (Just be sure the service you use is properly bonded or at least has errors and omissions insurance.)

It's much easier to implement these procedures from day one than to try to introduce them later. Implementation in an existing business requires a bit of tact; you don't want your employees to think you're questioning their integrity. You can usually navigate this by explaining that you're positioning the company for growth, and that outsourcing the bookkeeping and back-office functions so your employees can devote more time and energy to their core responsibilities is part of the process.

It can be awkward, but keeping your employees honest is a vital part of small-business success. And the truth is, most employees want to be honest. Working for a company that keeps a close watch on its numbers, and displays zero tolerance for fraud, makes that easier to achieve.

Topics: Small Business Advice, Bookkeeping Services, Business Advice, Milwaukee

Mark Schanen

Written by Mark Schanen

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